With an Eye on Deficit, Attracting Chinese Business Pits France against its European Neighbors

08/08/2016

A European Union (EU)-wide battle for business and finance from China has seen France to be in the forefront. Chinese interest in French aerospace, alcohol, cosmetics and luxury goods is growing even though it has been a little slower than Germany and the U.K. to ratchet up trade with Beijing. Balancing the large gap between French investment in China and vice-versa has been a major priority for the French government in recent years.

After the U.S., for France, the second-biggest goods trading partner outside the EU is China. However other EU countries, some of which it lags in terms of buying from China have been France's top trading partners. But France's third-largest export customer by 2030 would be China, forecasts HSBC.

"France has lagged some other euro zone countries a little in expanding its export trade into emerging markets, but we expect that to gradually change," the bank said in its Global Connections Trade Forecast on France.

According to MIT's Observatory of Economic Complexity, dominated by the aerospace sector, France's exports to China were worth $22.4 billion in 2014. Wine and spirits were the other major imports.

By 20230, China would be the second-biggest importer of French goods, says the HSBC report. The trade gap with China, which is a major contributor to its overall deficit, is being tried to be reduced by the French government. According to media reports, after the French prime minister visited China in 2015, Chinese Premier Li Keqiang told a news conference that China was "not purposely pursuing a trade surplus with France."

China's move to deploy capital outside its borders from the 1990s onwards has benefitted France which is one of the largest economies in Europe. The appeal of investing in Europe has been boosted by the euro’s weakness in recent times. Due to a number of big-dollar deals, a particularly successful year for the region for Chinese Foreign Direct Investment (FDI) was 2015.

According to law firm Baker &McKenzie, with more than double the previous year, France was a notable beneficiary and attracted $3.6 billion in Chinese FDI. Last year, this had made France the second-most popular European country behind Italy for Chinese FDI.

"The competition among EU states for Chinese capital has intensified, which already weakens European leverage vis-à-vis China on important strategic questions," the Mercator Institute for China Studies in Berlin said in a report in February.

The predominance of state-backed enterprises, possible bias by the Chinese legal system against foreign firms and concerns about unequal market access for European companies, French investment in China is a tricky issue. According to Invest in China, a government department, $1.22 billion of the total of 781 billion yuan ($117 billion) of FDI investments in China in 2015 came from France. While behind Singapore, South Korea, Japan, Taiwan and the U.S., this was roughly similar to the flows from Germany and the U.K.

"The new record figures for Chinese FDI in Europe are in stark contrast with stagnant or even declining FDI by European companies in China, which further increases the risk of imbalances in two-way FDI patterns," Mercator said.